• District Court Deems Plant Contamination “Direct Physical Loss”
  • February 9, 2015 | Authors: Ronald D. Puhala; Paul C. Steck
  • Law Firms: Goldberg Segalla LLP - Princeton Office ; Goldberg Segalla LLP - Buffalo Office
  • This commercial property coverage dispute involved a determination of whether the release of ammonia gas at a juice cup manufacturing plant constituted a “direct physical loss of or damage to” the policyholder’s property. As background, during the startup of a new manufacturing facility that used anhydrous ammonia as its refrigerant, ammonia was released, injuring one employee and causing the shutdown and evacuation of the plant. Gregory Packaging was required to hire a remediation company to clear the ammonia from the facility prior to resuming operations. This took several days.

    Gregory Packaging commenced this action seeking recoupment of the cost of damage to property and shutdown of the facility. Travelers denied the claim, contending that “physical loss or damage” necessarily involved a physical change or alteration to property, requiring its repair or replacement. Travelers further contended that the mere inability to use the plant did not constitute direct physical loss.

    In applying New Jersey law, the district court found compelling that the ammonia release rendered the packaging facility physically unfit for normal human occupancy until that ammonia was remediated, as the plant was evacuated for over a mile radius of the facility, and a specialty contractor was required to remediate the facility. The district court concluded that the ammonia discharge inflicted “a direct physical loss of or damage to” the policyholder’s property because the ammonia physically rendered the facility unusable for a period of time. The district court reasoned that while structural alteration provides the most obvious sign of physical damage, property can sustain physical loss or damage without experiencing structural alteration. Consequently, the policyholder sufficiently stated a claim for physical loss.

    Gregory Packaging, Inc. v. Travelers Prop. & Cas. Co. Of America
    (D.N.J., Nov. 25, 2014)